Re: Q: Advertising to tenant/buyers? - Posted by Dick Chelten
Posted by Dick Chelten on September 16, 2004 at 16:47:23:
Let’s review your math:
I use interest only loans so at 4.5%, my interest payment is $675. To that, I need to add for taxes and insurance. Because I don’t occupy the property, here in Michigan, my taxes are higher. On a $200,000 home, I reserve $450 monthly for taxes and $75 monthly for insurance. Total payment of $1200. Rent is actually less than you quoted, $1920, thus a monthly cash flow of $720 or $8,640 annually.
If I have used my own $20,000 as a down payment, $8,640 is 43% ROI! Pretty good return, even if I had to borrow from an Investor or bank for my down payment, right?
So, I get the cash flow each of two years, plus the “back end profit” which is always a 15% markup on the origianl purchase price. Remember, my model is to buy home 5% under list and sell for 10% over list-15% spread. In this case, we make $30,000 on the spread. Remember, however, that we are already holding $10,000 of our $30K profit in the form of a non refundable option fee.
So, totalling up the whole deal, we make $6,000 in real estate commissions, $8,640 cash flow year 1, $8,640 cash flow yerar 2, and $30,000 profit spread or a grand total of $53,280. Not bad for not buying the house first and speculating, is it?
Now, I know, there are investors out there who will warn against values going down and how we will lose big time. My response is that I buy good homes in great neighborhoods and that my tenant buyers want to own these homes-they aren’t there simply because it was a cheap rental-it was very expensive! They put down $10,000 or more in non refundable option money! Who else here on CREonline gets a predictable 5% as option money? Very few, I’ll bet money on it. My clients are really working towards home ownership, including paying to become involved with our credit repair program I arrange with a third party company. By the way, my credit repair company makes a commission from the eventual mortgage company that places the loan for the buyer when they get them credit approved so the credit repair company is anxious to make this work. At the same time the mortgage rep is anxious to make his commission upon placing the loan so he works hard to get my client financed, and , of course, the buyer wants to get financed asap, too. So, everybody is working to assure us of a successful rent to own program. I recommend it to others.
Oh, finally, regarding what a buyer would pay for a 400k home, I suggest you add 10% on the original home price, then figure what a 30yr 7.5% PITI would be and use that as your RTO rent payment. You can justify it by reminding your buyer that the rent figure is equivilent to what they will be paying in 24 mnths when they refinance in their own name. You’ll do very well. Your area may have a different property tax base requiring you to tweak to get your rent figure, but stick with this method. You won’t go wrong.
Dick Chelten
